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Edited Transcript of SQBG earnings conference call or presentation 8-May-19 12:30pm GMT

Q1 2019 Sequential Brands Group Inc Earnings Call

NEW YORK Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Sequential Brands Group Inc earnings conference call or presentation Wednesday, May 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Karen Murray

Sequential Brands Group, Inc. - CEO, Secretary & Director

* Peter J. Lops

Sequential Brands Group, Inc. - CFO

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Conference Call Participants

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* Andrew Mali

Roth Capital Partners, LLC, Research Division - Research Associate

* Steven Louis Marotta

CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst

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Presentation

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Operator [1]

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Thank you, and good morning. Before we begin, I'd like to bring your attention that statements that are not historical facts contained in this conference call are forward-looking statements that involve a number of risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the company. This may cause the actual results, performance or achievements of the company to materially differ from the results, performance or achievements expressed or implied by such forward-looking statements. We refer you to our public filings in the press release we issued this morning for a summary of such factors. The words believe, anticipate, expect, may, will, should, estimate, project, plan, confident or similar expressions identify forward-looking statements. Listeners are cautioned to not place undue reliance on these forward-looking statements, which may speak only as of the date the statement was made. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, whether as a result of information, future events or otherwise. Additionally, the terms adjusted EBITDA, non-GAAP income -- I'm sorry, non-GAAP net income and adjusted free cash flow are all non-GAAP metrics, and reconciliation tables for each can be found in the press release distributed today in the Investor Relations portion of our website, www.sequentialbrandsgroup.com.

On today's call are Sequential Brands Group CEO, Karen Murray; and Chief Financial Officer, Peter Lops. I'll now turn the conference over to Mr. Lops. You may now begin whenever you're ready.

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Peter J. Lops, Sequential Brands Group, Inc. - CFO [2]

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Good morning, and thank you for joining us on our first quarter 2019 earnings conference call. As announced last month, we are finalizing the sale of the Martha Stewart and Emeril Lagasse brands, which is on track to close in the second quarter. At the time of close, we will provide an update on the financials of our continuing operations, the active and fashion divisions.

First quarter performance, which includes the Martha and Emeril brands, came in below expectations due to prior year nonrecurring items in our fashion division, which was partially offset by growth in our active division. Total revenue for the first quarter ended March 31, 2019, was $36.9 million compared to $38.1 million in the prior year's first quarter.

On a GAAP basis, net loss for the first quarter of 2019 was $125.3 million or $1.95 per diluted share compared to a net loss for the first quarter of 2018 of $2.3 million or $0.04 per diluted share. Included in the net loss for the first quarter 2019 was $161.2 million noncash impairment charge related to the sale of the Martha Stewart and Emeril brands.

Non-GAAP loss for the first quarter of 2019 was $0.8 million or $0.01 per diluted share compared to a non-GAAP net income of $3.6 million or $0.06 per diluted share in the prior year period. Adjusted EBITDA for the first quarter of 2019 was $16.8 million compared to $21.2 million in the prior year's first quarter, impacted by production costs for Martha & Snoop's Potluck Dinner Party as well as marketing investments, such as AND1's initiatives for its 25th anniversary.

Our adjusted free cash flow was $2.3 million for the first quarter of 2019, which is calculated as adjusted EBITDA less cash interest, cash taxes and capital expenditures, and therefore, excludes items that we do not consider core to our licensing business. We closed the first quarter of 2019 with $17 million of cash, including restricted cash, and with $610.8 million of debt, net of cash. Upon closing the Martha sale, we expect to pay down approximately $110 million in debt and keep the remaining cash on the balance sheet as we evaluate potential strategic initiatives for the company following the closing. We look forward to updating you on full year guidance for 2019 after the close of the transaction in the second quarter.

With that, let me turn the call over to Karen.

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Karen Murray, Sequential Brands Group, Inc. - CEO, Secretary & Director [3]

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Thank you, Peter. Today, I'm excited to begin sharing the transition underway across the company. Last month, we announced that we signed a definitive agreement to sell the Martha Stewart and Emeril Lagasse brand, which is a meaningful step in delevering. While we made progress growing the Martha Stewart brand, we were unable to achieve the high EBITDA margin that we have with our other divisions. Following the close of the sale, we expect to realize significant cost savings, including plans to eliminate our current corporate headquarters, which was the former Martha Stewart headquarters. This year will include partial savings from these cost reductions, and the full impact of these savings will be realized in 2020.

While first quarter results came in below expectations, we are excited to now focus our efforts on our active and fashion brands. There are significant untapped opportunities for several of our brands in areas such as health, wellness and beauty. In addition, we believe there are new, innovative ways to generate recurring revenue streams beyond licensing. I plan to share more about our go-forward strategy on our next call.

With that, let me jump in to some of the highlights by division. Please note that while the first quarter still includes the home division, I'll focus my remarks on our active and fashion brands.

First, the active division, which is our largest and includes the GAIAM, AND1, AVIA and SPRI brands. These brands are well positioned with strong market share across multiple tiers of distribution and with several opportunities for category expansion.

International is a huge opportunity for American brands in the active space. As the global population continues to shift their focus towards health and wellness, we are well positioned to benefit from this trend and plan to strengthen our presence abroad.

Our AND1 brand is performing well across all categories at Walmart. We recently added 2 dynamic sportswear industry executives to our AND1 team for a focus on building the brand's presence in sporting goods chains and niche boutiques across the U.S. We implemented new marketing initiatives in the quarter tied to the brand's 25th anniversary, including establishing an AND1 foundation that gives back to the community.

Our yoga, health and wellness brand, GAIAM, is also performing well driven by performance from its core hardline business at Target, Amazon and other retailers. We're excited about the reaction we've received on our men's line, which is a growing category in the activewear industry and an area where we believe the brand has an opportunity for future expansion.

We recently signed a new partnership for GAIAM for a line of personal care products. Additionally, the apparel collection codesigned by the brand's global ambassador, actress Jessica Biel, is performing well at specialty stores, including Bandier, and plans are underway to expand it to more retail locations later this year.

The AVIA brand continues to perform well at Walmart with strength in women's and children's apparel, footwear and accessories. In the quarter, we launched a new AVIA capsule collection codesigned by our global brand ambassador, actress Vanessa Hudgens, on avia.com as well as at Select, Macy's and plans are underway to expand into more stores this fall.

SPRI, one of our smaller but growing active brands, is a leading line of exercise products for the health and fitness industry, distributed through various retailers and found at gyms and hotels nationwide. The line includes medicine balls, exercise bands and other products. We're focused on growing the brand into new categories and areas of redistribution moving forward.

For the fashion division, primarily due to last year's nonrecurring items, we're expecting declines in the business. We have been transitioning certain partnerships and adjusting some of our marketing and distribution strategies, which impacted results this quarter and will continue throughout the year. We feel good about the work underway and the progress we're making to best position our fashion brands for 2020.

Starting with the Jessica Simpson brand, we launched jessicasimpson.com, and consumers can now experience the world of Jessica while having access to purchase products such as fragrance, footwear, denim, luggage, handbags and swimwear. The launch is off to a great start. According to Shopify, traffic to the site was in the top 2% of their online stores that launched the same week.

We're on track to launch the brand's beauty business this fall, and beauty continues to be a category with significant growth opportunity for the brand. Also, in September, Jessica will be on HSN, showcasing her line of footwear, denim and more. We have a robust pipeline of new business and renewals of key licenses underway for the Jessica brand.

Moving to the Joe's brand. In the quarter, we debuted a collaboration for the brand with social media influencer, Danielle Bernstein. The line was launched with overwhelming success, selling out on joesjeans.com. In addition to online, the special collection is also performing well at REVOLVE, Bloomingdales and Saks. Denim continues to be the core category performer for the brand. We're rolling out new categories, including a fragrance line and hosiery, this fall. International remains a strong business for Joe's, and we're currently exploring opportunities in Dubai and Australia.

In closing, we're pleased with the work underway to transition the company. After we close on the sale of the Martha and Emeril brands, we expect to have an improved net leverage profile, additional cash on our balance sheet and a focused portfolio of high-margin fashion and active brands. I look forward to updating you then on our plan to deliver meaningful value to our shareholders.

Thank you for joining us today. I'll now turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Dave King with Roth Capital Partners.

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Andrew Mali, Roth Capital Partners, LLC, Research Division - Research Associate [2]

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This is Andrew stepping on for Dave. I guess just to first start off with Martha. We have the -- when you bought Martha, it was supposedly contributing about roughly $34 million in EBITDA, call it. Are we off in thinking that business is down about 50% since then? And then alternatively, where do you expect to be on leverage post sale? Is about 5.5x leverage kind of in the ballpark there?

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Peter J. Lops, Sequential Brands Group, Inc. - CFO [3]

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So Andrew, it's Peter. I think Karen alluded to in her remarks we're going to give some more information regarding the sale after the close. So you'll get firm answers to your questions then, though I will tell you, I think, your number is off by a bit, but we'll provide that information shortly when we close.

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Andrew Mali, Roth Capital Partners, LLC, Research Division - Research Associate [4]

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Great. That's helpful. And then just further -- if you could maybe talk about any -- if you have any further plans to reduce debt throughout the year. And then you do guys also have what the GMRs were at the end of the quarter? I think in 4Q '18, they ended at about $320 million. Would you guys happen to have that number?

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Peter J. Lops, Sequential Brands Group, Inc. - CFO [5]

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Yes. So GMRs at the moment, which includes Martha, are about $330 million. So they're pretty consistent. They have their natural ebbs and flows. Not much has changed. And they'll, of course, be adjusted after the transaction, but the same ratio will hold true going forward where we'll continue to make up about 2/3 of our revenue from GMRs. And was there a first part to the question that I missed?

P id="596108679" name="Andrew Mali" type="A" /)

Yes. Just if there's any potential plans to reduce debt further throughout the year.

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Peter J. Lops, Sequential Brands Group, Inc. - CFO [6]

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Yes. So we're continuing to evaluate. We'll certainly pay down the $110 million that we had talked about, approximately $110 million, in the opening remarks. The remaining, we're working closely with our Board right now. We're in the middle of that process, evaluating a couple of options and sorting out what is the best use of that money, and paying down debt is certainly one of the options.

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Andrew Mali, Roth Capital Partners, LLC, Research Division - Research Associate [7]

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Great. That's helpful. And then lastly for me, just on some of the proceeds that you're going to get from the sale, are you looking at any potential acquisitions? And how do you feel about any opportunities maybe in the activewear space? I know you've been kind of positive on that area. So...

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Peter J. Lops, Sequential Brands Group, Inc. - CFO [8]

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Yes. We're still very bullish on active. It's performing well for us. So I think the category is doing very well. In terms of acquisitions, we're constantly looking at acquisitions as part of what we do, as part of what our Board does. We're going to be very disciplined. We're going to be very smart and patient and make sure it is the right one for the company, something that continues to allow us to delever and also would be accretive. So we're constantly looking at acquisitions and trying to set up Sequential for future success.

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Operator [9]

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Our next question comes from the line of Steven Marotta with CL King & Associates.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [10]

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Karen, you alluded to fashion moves in fiscal '19 that are teeing up this year for a negative year-over-year comparison. Can you talk a little bit about what those were specifically?

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Karen Murray, Sequential Brands Group, Inc. - CEO, Secretary & Director [11]

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Sure. Steve, I mentioned in my script, and we're again -- we're looking at from prior year nonrecurring items in fashion, and they are impacting the quarter and the year. We had a few transitions in fashion. For example, Ellen Tracy footwear, that was a licensee that we transitioned to a new partner, and it's a strong partner that we are relaunching but not until later this year. Initially, we thought it would be earlier in the year, but it's moved out a quarter. We also have a partner that I alluded to during the last call that we were having some issues with, and we terminated that partner in Jessica. If you remember, we sold Revo and FUL. That's not included in this quarter. And there's continued softness at Heelys. So between the transitions with partners, the partner we terminated, Heelys' continued softness, Revo, FUL and additional expenditures in marketing, which again, we could not -- we had made commitments in marketing and we continue to feel that they're important for all of our brands. And in the quarter, there were marketing commitments for all 3 areas, home, active and fashion. Throughout the year, we're cutting back on some of our advertising commitments, but we had marketing commitments in the first quarter that we still are executing against.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [12]

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Okay. And with regards to the headquarters moving, can you talk a little bit about the timing there and the magnitude? Would this occur immediately after Martha is divested? Or is there going to be a lag of a quarter or 2? And again, can you talk a little bit about the magnitude?

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Peter J. Lops, Sequential Brands Group, Inc. - CFO [13]

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Yes. Sure, Steve. So it's certainly something we're in the middle of right now. We've begun looking to sublet the space. We're working with a broker. There's no one specifically found yet. There's been plenty of traffic and interest. So it's not immediate, but it's hard to sort of predict the time based on when you find the right person to come in and take the space. And we expect that, that will have a significant impact as we become a smaller company and have much lower rent.

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Karen Murray, Sequential Brands Group, Inc. - CEO, Secretary & Director [14]

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We have a little bit of a benefit this year, but there's a much more significant benefit next year.

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Peter J. Lops, Sequential Brands Group, Inc. - CFO [15]

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When the sublease is completed.

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Karen Murray, Sequential Brands Group, Inc. - CEO, Secretary & Director [16]

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Yes.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [17]

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My last question is, excluding Martha Stewart, have the balance of the brands within the portfolio in the aggregate exhibited consistent organic growth? And by extension, would you expect similar going forward?

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Karen Murray, Sequential Brands Group, Inc. - CEO, Secretary & Director [18]

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Sure. Again, we spoke about active, and we feel really, as Peter said, bullish about that business. Activewear is and continues to grow. We're going to expand our active brands into health, wellness and beauty. But the AVIA brand has not just strength at Walmart but international strength. And as you know, we partnered with some global brand ambassadors that are really helping to propel the brands. But we feel very good about AVIA, AND1. GAIAM is doing well. So the active brands are doing very well, including SPRI, which is, again, small but growing.

And fashion has a lot of newness that's coming in towards the balance of the year as we transition these partners. And I think almost every partner is upgraded, and I believe that we'll start to see traction in that business as well. I mentioned that we launched jessicasimpson.com. The initial indications on that site and sales on that site are really strong. So we feel good about that and her coming back into the marketplace in a stronger way. She'll be on HSN this fall. So there's movement in fashion with new partners and with new marketing and feel very good about the focus in on all of our active brands. So we're just refocusing our efforts in the areas that we told you were high margin and that we feel really good about, and that's both fashion and active.

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Operator [19]

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Thank you. Ladies and gentlemen, this concludes the Q&A session and, thus, concludes our call for today. Thank you for your participation and interest. You may disconnect your lines, and have a wonderful day.